Why Even the 1% Are Fed Up With Wall StreetLike many Americans, Al Checchi is fed up with Wall Street. But the 63-year-old isn't joining the protestors at Occupy Wall Street. Checchi is a multimillionaire. His beef is with the institutions that he chose to manage money for him, assuming the returns they'd achieve would at least keep pace with the broader market averages. That isn't what happened.

"I won't name names, but I invested with all the usual suspects -- name-brand investment banks and commercial banks, hedge funds, private equity and venture capital funds," says Checchi, who retired a few years ago after a career that included top positions with Marriott (MAR), the Bass brothers, Walt Disney (DIS) and Northwest Airlines (DAL), where he engineered a leveraged buyout and served as chairman. "I assumed they were professional. I was appalled."

The loss of faith in the professionals on Wall Street is a sentiment that has reverberated across the American investment landscape since 2008, amid mounting criminal convictions and civil fines for insider trading, and fraudulent marketing. Monday's bankruptcy filing by MF Global and the news of discrepancies in its books have only added to investor concerns.

But what's unique about Checchi's story is that he is willing to openly discuss what few wealthy investors will admit: Scandals aside, much of the harm caused to portfolios comes from standard operating procedures in the industry, practices Al Checchi calls "the difference between being a fiduciary and being predatory."

Checchi's story begins after he retired, when he asked his son Adam, a Harvard-educated computer science major and MBA, to analyze the family fortune, which Forbes listed at $600 million in 1997. (The Checchis wouldn't reveal the portfolio's current value.)

"I did the analysis on it and I was horrified," Adam says. "When I compared where they started and the money they put in relative to owning a basic index of stocks and bonds, they were far below that."

No Smoking Gun

Al Checchi, who was born into a middle-class Italian-Catholic home in Boston, and who spent $40 million in 1998 on an unsuccessful campaign for California governor, admits he wasn't paying close attention, and he makes no claims that his money managers engaged in illegal behavior -- they simply displayed an abysmal lack of ethics.

"There wasn't a smoking gun or a Bernie Madoff or a huge blow up in an investment," says Adam Checchi. Rather it was expensive advisory fees, brokerage costs, and short-term trading resulting in high taxes -- compounded over a quarter century – that diminished the portfolio. Those practices skimmed 4% to 5% off the family fortune each year, he estimates.

The Checchis do have a self-serving motive for sharing their disenchantment: Three years ago, they opened their own wealth management firm, Checchi Capital Advisers. Using technology to develop a proprietary trading platform, that claim they can give clients who have $5 million to $100 million maximum diversification -- exposure to every equity and bond globally -- at the more efficient pricing. Clients have separately managed accounts in which they own individual equities and bonds and greater flexibility to customize their portfolios.

The Checchis say their portfolio is built for very low turnover, to minimize trading costs and taxes. The management fee is 0.75%. While competing wealth managers can be close to that range, typically 1% to 2%, the Checchis say they don't have the hidden costs that wreaked havoc on their portfolio, nor do they steer clients to expensive products on which they make commission.

"In almost every other business, when technology improves, the customer gets better experience and a lower price, but not in money management," says Adam Checchi. "The gains in efficiency have been kept by Wall Street and not passed on to the customer. It's not transparent, you have no idea where they are making money and we want to change that."

'An Easy Get'

Nomi Prins, a former managing director with Goldman Sachs, described some of the Street's practices in her 2006 book, Other People's Money: The Corporate Mugging of America. Now an author and senior fellow with Demos, the liberal think tank, she confirmed the Checchi's assertions.

Wealth managers aren't necessarily given a specific percentage they are expected to extract from clients' assets, says Prins. "But it's a basic idea: If you have the ability to make money out of a certain set of clients, you will try to do that," she says. "The mandate from the top is to be profitable, and if you have an effectively captive fund that you can use to increase your bottom line, then it's kind of an easy get."

Adam Checchi said his family mistakenly expected an institutional philosophy to guide their asset management. "Some of the big banks will say, 'Welcome to Bank XYZ, where obviously your money is managed on an institutional basis.' The truth is, the person who manages the money has total discretion. You may be getting someone who is listening to mutual fund wholesalers tell them how much they can make selling those products to you."

Moreover, the big investment banks have inherent conflicts of interest that boost client costs. For example, the firm is paid to underwrite a corporate bond offering, and "you are now the distribution channel for them, whether that fits your portfolio or not," says Al Checchi. "Second, they are selling you things they want to get rid of from their inventory where they mark them up and you don't know how much the mark-up is. Third, they are putting you into hedge fund investments where they have a relationship with the fund. In many cases, we'd find the hedge fund managers used to be members of the institution and there was now mutual backscratching going on."

Prins agrees the conflicts are problematic. "The companies that create securities that go in your portfolio should not be the companies managing your portfolio, even if they are separate parts of the firm," she says.

A former investment manager with a major Wall Street bank who had several hundred million dollars under management before she retired called that view a sweeping generalization. "I managed money and I could not care less what my firm was underwriting," says the manager, who asked not to be identified. "I didn't take bonds and place them in my clients' accounts. My clients wanted an underwriting more than I wanted to give it to them because they hoped it would be a hot one. I thought the best way to retain the most assets long-term was to make my clients money -- and the way to do that was to be decent and honest and have a good rate of return."

Beating the Indexes

The last few years have also reminded investors that few money managers can beat the returns of an index fund, which mirrors the performance of the market as a whole. And index funds are a lot cheaper.

Over the 23 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year, according to a Wharton research paper. Meanwhile, the average actively managed stock fund costs 1.3% annually (or $1.30 for every $100 under management) and the average bond fund 1% -- while index funds fees run as low as 0.5%.

Here's what that looks like for rich people: If you put $10 million away for 20 years and it grew at an average of 8%, and you paid 2% in excessive costs, you would lose $14.5 million, or 145% of your original principal. (That includes the compounded rate of return on those fees if they'd been left in the portfolio.) "If you were to ask me what my folks missed out on, it was somewhere around that factor on their savings," says Adam Checchi.

"People buy into brand names thinking their guy or gal sitting in the office can outguess collective millions of investors across thousands of assets out there," he continues. "It makes no sense but that's what people believe. The compact people had with their broker-advisers was they knew how to zig and zag, and that's what they paid them for. Suddenly, their faith in the guy or gal went away because everybody had the same experience [in 2008] and it was terrible."

Greed and Defensiveness

The Checchis skepticism deepened after Wall Street handed out $18.4 billion in bonuses in 2008, the sixth-largest payout on record, according to the New York State comptroller. The haul rose by 17% in 2009 to $20.3 billion.

"I truly don't think Wall Street has done itself any favors in the last couple years by continuing to demonstrate a level of greed and defensiveness that's unjustifiable," says Adam Checchi. "We all watched on TV as the heads of banks spoke [before Congress] and they didn't seem credible. It was so clear so many people were acting irresponsibly just to turn a buck."

For Prins, that's a recurring theme: "The managers didn't protect [investors] from Enron either and told them to buy the stock when their own companies said it was a piece of sh--. We have periods where it becomes more known to more people and then it's forgotten about. But it's the same idea: You're giving a lot of trust to people who have the incentive to milk you."

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November 07 2011 at 7:38 PM Report abuse rate up rate down Reply


November 03 2011 at 7:34 PM Report abuse -1 rate up rate down Reply
1 reply to dad's comment

What goes up, must come down. It has before.

November 03 2011 at 8:22 PM Report abuse +1 rate up rate down Reply

It's a small comfort to know that the big boy's have the same problems we little guys have. When I started out with 3 or 4 good solid funds everything went along pretty well,but as I became more experienced (Ha Ha) I was taught to diversify and diversify and buy this and buy that until performance was not so great after fees and espenses,not to mention the extra time to keep track of everything. Simple is better!

November 03 2011 at 9:17 AM Report abuse rate up rate down Reply

beware of well dressed people was a constant theme from my grandpa. farmers, and tradesmen are those to be trusted. invest in youself and family. If you do buy stocks, utility and consumer stocks with dividends are the ones to buy. NEVER trust a suit with your money.

November 03 2011 at 7:14 AM Report abuse +1 rate up rate down Reply

An excellent read : The Quest for Alpha, by Larry Swedroe. Increasingly, academic research is demonstrating that active management for average investors is a loser's game. Indexing is the way to go. Sounds like that may also be the case for the rich as well--or at least until every seller, adviser, and institution of financial goods and services is legally bound to a fiduciary standard and obligation to clients. As one writer observed of Wall Street brokers decades ago by his book title: "Where Are the Customers' Yachts?" My, how little has changed.

November 03 2011 at 1:28 AM Report abuse +1 rate up rate down Reply
1 reply to MONTOOTH's comment

Just ask John Bogle of Vanguard. He preached this for years.

November 03 2011 at 9:31 AM Report abuse rate up rate down Reply

Do you blame her? Wall St is in the hands of robbers. Progaram traders, Short sellers rob our accounts everyday in billions. Unless government changes the rules it is not going to get better. Wall St is worse than a casino. The more volatility there is more money make every single day. Only one solution. Take your money out and put it in a regular bank account. This way atleast we dont loose our principle. Only way to teach lesson to Wall St is to take our monies out. Few are making billions by robbing millions of people. I wish the government will tax those people so heavy, they will think twice before robbing millions of peoples account on a daily basis. Take your monies out of Wall St casino.

November 03 2011 at 12:35 AM Report abuse -1 rate up rate down Reply
1 reply to beach140's comment

I totally disagree with the comment above to "Take your money out and put it in a regular bank account." That is terrible...TERRIBLE advice. I retired last year. I invested a lot in the markets over a career of about 20 years. I recently conducted an analysis of my returns over those years and while it is far below the performance of the major indexes over the same period--the return is far superior to the return then and especially now of a "regular bank account." Or CDs, or money markets accounts. Investors can preserve principle through sound, regular investing in a mix of securities and if you've got time, indexing is the way to go. Invest in the total market for stocks and the same is true for bonds--dollar cost average over the years and you'll be pleased with the results.

November 03 2011 at 1:34 AM Report abuse rate up rate down Reply

In G-d We trust but ALL others pay CASH...

November 02 2011 at 10:21 PM Report abuse rate up rate down Reply

They call it EATING THEIR YOUNG...surprise surprise suprise that WS is..well not a bible camp..gosh..geeze and they where so nice too taking me to lunch..gosh...and I am 1% so I thought well they just cheat the LITTLE PEOPLE..
Nah they cheat everyone equally...I would join OWS If I where you..

November 02 2011 at 10:19 PM Report abuse rate up rate down Reply

SO the bottom line is that people are stupid and greedy

November 02 2011 at 8:28 PM Report abuse rate up rate down Reply

Think Checchi complained about his investments prior to 08? That's why the top 1% own 50.9 of stocks, bonds and mutual funds. Checchi hated the market so bad, he opened Checchi Capital Advisers. Think any of his 600 million came from the market?

November 02 2011 at 8:11 PM Report abuse rate up rate down Reply